New commentary from DBRS Morningstar [1] highlights how the company looks at banks’ management of climate-related risks, in particular, from a credit perspective.
According to DBRS, banks are exposed to a number of environmental risk factors and the impact of these risk factors on banks’ credit ratings has been very limited to date for banks rated by DBRS. Nevertheless, climate-related risk factors have the potential to be a negative impact on banks’ credit ratings over time and should be preemptively mitigated.
But even today, large banks are typically balancing a number of different objectives to assess climate-related risks and opportunities. In addition, they generally continue to support clients that are seen to have sufficient plans to transition to net zero emissions now or in the future.
In terms of banks’ credit ratings, DBRS assesses overall climate-related risks, and how banks are incorporating this evolving risk into their risk management framework. For example, whether banks are developing stress testing tools is an indication of their appetite to adjust as appropriate, and this can be more challenging for smaller and medium sized banks.
Many other initiatives have been reinforcing and complementing preexisting framework. The Net Zero Banking Alliance (NZBA) framework, for example, allows for a comparison between peers based on targets that are comparable. Once banks commit to the NZBA, they are required to publish interim targets within 18 months, starting from 2030 (or sooner) with intermediary targets to be set every five years. The NZBA covers 41% of assets financed by banks worldwide.
Monitoring climate-related risks is a quickly evolving field of expertise. Any progress communicated by the banking regulators is important. The first rounds of climate-related stress-tests were presented as learning exercises, and there were no implications in DBRS's credit assessments.
“As a credit rating agency our core focus is on assessing the credit risk,” said Vitaline Yeterian [2], Senior Vice President, European Financial Institutions at DBRS Morningstar. “To date, the impact of climate-related risk factors on banks’ credit ratings has been marginal for banks we rate. However, looking ahead, climate-related risks are likely to remain a priority for banks given regulatory pressures.”
Click here [3] to see the PDF published on this topic by DBRS Morningstar.